The fiscal cliff: What to expect if there's no deal

(CBS NEWS) -- Well, here we are less than a week before the "fiscal cliff" hits and
lawmakers are scrambling to come up with at least a partial solution
President Obama has cut short his Hawaiian vacation to help push
Congress along as lawmakers return to get to the business of dealing
with the "cliff."

What happens if the country is forced over the "fiscal cliff" on January 1?

Various
federal tax cuts and breaks enacted under President George W. Bush
expire as well as the payroll tax holiday enacted under President Obama.

About
$1.2 trillion in federal spending cuts begin to kick in (approximately
$110 billion a year for 10 years), divided equally between the Pentagon
and most other federal agencies.

And federal jobless benefits expire for 2 million unemployed Americans.

Hitting the national economy with the double whammy of tax increases
and spending cuts is what's called going over the "fiscal cliff." If
allowed to unfold over 2013, it could lead to recession, a big jump in
unemployment and financial market turmoil, economists predict.

Taxes

If
lawmakers fail to work out any sort of deal, there will be severe
long-term consequences for the economy: According to the Tax Policy
Center, going off the "cliff" would affect 88 percent of U.S. taxpayers,
with their taxes rising by an average of $3,500 a year; taxes would
jump $2,400 on average for families with incomes of $50,000 to $75,000.
Because consumers would get less of their paychecks to spend, businesses
and jobs would suffer.

Many economists, as well as the
nonpartisan Congressional Budget Office, say the combination of spending
cuts and tax hikes that are set to take effect would tip the economy
into a new recession. The Congressional Budget Office has forecast that
implementing all the mandated government spending cuts and tax hikes
would reduce real GDP by 0.5 percent in 2013, with growth sinking in the
first half of the year before resuming at a modest clip later in the
year. The CBO forecasts that inaction would push up the unemployment
rate to 9.1 percent by the end of 2013.

"The consequences of that would be felt by everybody," Federal Reserve Chairman Ben Bernanke said.

Spending Cuts

If
the nation goes over the fiscal cliff, budget cuts of 8 percent or 9
percent would hit most of the federal government, touching all sorts of
things from agriculture to law enforcement and the military to weather
forecasting. A few areas, such as Social Security benefits, Veterans
Affairs and some programs for the poor, are exempt.

The
spending cuts, meanwhile, are phased in gradually. It's not as though
$1.2 trillion would suddenly disappear from the economy at the end of
the year: The cuts, while undeniably significant, are set to be phased
in over a decade. In addition, there are budgetary maneuvers that can be
taken to at least somewhat soften the blow of both the tax hikes and
spending cuts. (The Treasury Department could, for instance, freeze
paycheck withholding levels.) Certainly, total inaction on the "fiscal
cliff" over the long term would likely have a deeply negative impact on
the economy. But if a deal comes in January or February, after the
deadline - as it well could - the structural damage could be relatively
small.

The debate

Mr. Obama says
any deal must include higher taxes for the wealthiest Americans. Many
House Republicans oppose raising anyone's tax rates. House Speaker John
Boehner tried to get the House to vote for higher taxes only on incomes
above $1 million but dropped the effort when it became clear he didn't
have the votes.

Republicans also insist on deeper
spending cuts than Democrats want to make. And they want to bring the
nation's long-term debt under control by significantly curtailing the
growth of Medicare, Medicaid and Social Security - changes that many
Democrats oppose.

If lawmakers reach Dec. 31 without a deal, some economists worry that
the financial markets might swoon. Would traders start to panic if
Washington appeared unable to reach accord? Would worried consumers and
businesses sharply reduce their spending? In what could be a preview,
stock prices around the world dropped Friday after House Republican
leaders' plan for addressing the fiscal cliff collapsed.